CEIOPS' Advice for Level 2 Implementing ... - EIOPA - Europa

∑ − n 1
s=
k
SCR
CoCM k = CoC ⋅
.
( 1 + r
s
s+
1
( s+
1,
k)
)
B.7. If the reference undertaking covers CoCMk with risk-free assets that match
the cash-flow pattern of the formula, then these assets earn during the
year from t=k to t=k+1 an interest of
∑ − n 1
s=
k
SCR
CoC ⋅ r(
s,
k)
,
( 1 + r
s
s+
1
( s+
1,
k)
)
and the unwinding of the margin in that year (including the interest) yields
an expected profit of CoC·SCRk as can easily be calculated
The capitalisation scenario
B.8. The reference undertaking receives the obligations as well as assets to
cover best estimate and risk margin from the original insurer. The
reference undertaking has no own funds to cover the SCR relating to the
obligations. In order to meet the capital requirement, the reference
undertaking requests external capital of the amount SCR0 for one year.
The interest on this capital is CoC+r(1,0), so in return, the reference
undertaking has to pay back the amount (1+CoC+r(1,0))·SCR0 at the end
of the year.
B.9. Under the assumption that the obligations run off according to best estimate
assumption, the position of the reference undertaking at the end of
the year (t=1) is as follows:
• The development of the best estimate does not affect own funds: the
assets covering the best estimate in t=0 plus the risk-free rate
earned during the year equal the claims payments during the year
and best estimate at the end of the year.
• The unwinding of the risk margin produces own funds of the amount
CoC·SCR0.
• The assets covering SCR0 earn a risk-free rate of r(1,0)·SCR0.
• The repayment of the capital reduces own funds by (1+CoC+r(1,0))·
SCR0.
To sum up, the own funds of the reference undertaking are reduced by the
amount SCR0, so that own funds are zero again.
B.10. Therefore, the reference undertaking is at t=1 in the same situation as at
t=0. It has to raise new capital of the amount SCR1 in order to meet the
SCR. The process outlined above can be iterated until run-off of the
liabilities. At t=n, the reference undertaking is relieved from the insurance
obligation and no own funds will be left.
B.11. This proves that the formula stated in this advice is in line with the risk
margin definition of the Level 1 text. In particular, the way of discounting
98/112
© CEIOPS 2010